Ladies and gentlemen, thank you for holding and welcome to the Q1 2016 results call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone. I would now like to hand the conference over to your host today, Annika Falkengren. Please go ahead.
Thank you very much. Welcome to the presentation of our results for the first quarter. Going to slide number two. The quarter started with a stock market tumble and renewed concern driven by oil prices and also the slowdown in China. Credit spreads widened sharply. In addition, both the Swedish Riksbank and ECB lowered interest rates during this first quarter. As a result, customers became more cautious, which reflected in the low level of activity and continued strong demand for risk management services. Still, the quarter, particularly March, ended on a more positive note. We continue to strengthen our balance sheet. Asset quality is also in this quarter very good. On page three, as we have previously communicated, we changed our organization at the turn of the year. We are now based on our customer segments and not products.
In connection with this, we also changed the basis for calculating goodwill at a lower organizational level than before. This means that we write off goodwill with SEK 5.3 billion. At the same time, we took another SEK 600 million in non-recurring expenses related to the de-recognition of IT assets we no longer use, as well as for cost adjustments in the Baltic countries and also a little in Germany. For the sake of simplicity, I will continue to present the underlying operational results. That is excluding the one-off effects, as we clearly disclosed on March 29th. This so you can follow how the bank is actually doing. Market conditions were challenging both for our customers and also for us. Income decreased by 9% compared with the last quarter 2015. Costs fell by 1%. Operating profit fell 18% from the previous quarter to SEK 4.5 billion.
Return on equity was 10.1%. Our common equity Tier 1 capital ratio increased to 19.1%. I will now briefly comment on the different lines. If we start on NII on slide four, it decreased 1% compared with the previous quarter and by 6% compared with the same quarter last year. Customer-driven net interest income increased by 3% compared to the previous quarter, primarily due to slightly better margins on both deposits and lending. In this environment, we support the division's deposits. You might say that we internally subsidize. This also explains why net interest income from what we call funding and others also decreases. Lending volumes increased slightly, SEK 15 billion since the beginning of the year, as we see higher demand from Swedish small and medium-sized enterprises, as well as from certain segments in the Baltics.
We have some growth in mortgages, even if we continue to grow slower than the market. We grew with 3.2% versus the market growth of 8.3%. It is difficult to predict volume development going forward. Credit demand among large corporates remains low. We are more affected by international sentiment. It seems maybe a bit more optimistic among companies operating in Sweden. Going to page five. Net fee and commission income fell by 11% compared to the previous quarter and by 17% from last year. The reason is primarily that market values are down in the quarter. For example, the Stockholm Stock Exchange fell 7% on average. Lower market values decreased managed volume and produced also very limited performance fees in this quarter. In the first quarter, we also had full effect from interchange fees in the card operation, which affected the result by SEK 85 million compared to previous quarters.
Aside from a few IPOs, there have been very low activity in business segments, and larger loan transactions have been lacking in the market. We attracted, though, further inflows of assets under management, SEK 7 billion this quarter. On slide six, you see the NFI decreased by 15% versus the previous quarter and by 19% against the first quarter 2015. The main reason is what we have the mark-to-market valuations, the CVA, DVA, and OCA, working against us this quarter which we all know can vary a lot between the quarters. In the fourth quarter, they contributed to plus SEK 121 million, and now in the first quarter, they were negative, minus SEK 153 million, mainly impacted by low volatility credit spreads.
Customer activity has been good in both the fixed income and foreign exchange markets as customers have demanded hedging services, while the equity side has some headwinds from stock market trends and the lower number of IPOs seen in the quarter. Operating leverage on page seven. The first quarter of our new three-year plan has been challenging on the income side. We are actually now focusing on the 11 quarters that actually remain on the business plan. We have for years worked successfully with the cost cap, and as a result of the change in reporting for our live operation, we have also adjusted our cost cap accordingly to now being SEK 22 billion for this year and next year.
On page eight, when we see the division according to our new customer-centric organization, the important thing is really to follow how our customer segments interact with us and how we make sure that we fulfill all their needs and not follow the product as such. Seasonally, the first quarter is usually weaker than the fourth quarter, and that is so also of course this year. There's also a big difference between the first quarter this year and last year when the stock market percent in Q1 2015, and we did not have negative interest rates at this level. A lot can happen in one year. If we look at large corporate and finance institutions, the result is down by 19%, excluding one-off effects from the previous quarter.
Given uncertainty in the market, customer demand for risk management services across all asset classes was good while the number of larger transactions have been very few and credit demand has been held back by uncertainty. Among finance institutions, client activity was high as clients, given the current interest rate environment, looked for other investments with better returns. Profit for the first quarter amounted to SEK 2.2 billion. It's actually more or less unchanged versus Q1 2015 if you exclude the effects from market valuations, the CVAs, et cetera, for about SEK 300 million. Q1 on large corporate and institutions is actually pretty close to flat. We move to corporate and private customers in Sweden. They were affected by negative interest rates and the interchange fees on cards, and operating income fell by 3% compared to the previous quarter.
Since last summer, we have grown more slowly in mortgages or basically at half the pace of the market. That is still the case. We see that households, in line with the increase in housing prices, find it harder to meet our criteria of 7% interest rates, a total debt limit of five times gross household income, and amortization, and that is particularly felt in Stockholm. On the corporate side, we see that both the number of customers and the volume of loans are increasing, which I will return to shortly. Life and investment management reports lower earnings, down 18% from the previous quarter. Here, the stock market decline hits asset values and both base commissions and performance-based income declined. Weighted new sales within Life increased by SEK 13 billion or 8%. This quarter, we launched traditional insurance even on the occupational pension side, which we are alone to do.
Baltics showed flat income compared to the previous quarter and adjusted for non-recurring items. Profit increased slightly. We saw a small mortgage increase in Estonia and Lithuania. Also in Lithuania, corporate lending also increased, and credit quality in the Baltic countries remained good. We then go over to the balance sheet on slide nine. It has been further strengthened during the quarter. Credit quality remains very good, and the credit loss level is eight basis points. We still have around a quarter of our balance sheet in liquidity reserves. Our common equity Tier 1 capital ratio was 19.1% compared with 18.8% at year-end. The ratio increased primarily due to risk-weighted assets declining in the quarter as a result of lower market risk. To conclude before we open up for questions, customer expectations will be the key to our efforts in fulfilling our goals.
The starting point is always to have relevant products and services for our customers at all times. We want to have satisfied customers who really feel that we do create value for them. We are really committed to the world-class service that we will make sure that we also deliver. With this, I'll be happy to take questions together with Jan Erik and also Jonas.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. You can cancel your request at any time by pressing the hash key. Your first question comes from the line of Omar Keenan of Deutsche Bank. Please go ahead.
Good afternoon. Thank you very much for taking the questions. I just had two revenue questions, please. My first question is on fee income. I was hoping you'd help us understand how the recurring fee income has changed, particularly around the kind of securities financing revenues. If I look at 2015, last year, particularly at the net security commissions revenues, it looked like these were seasonally higher by about SEK 840 million in Q2. I just wanted to follow up on the comments from the press conference and see, is this SEK 800 million completely disappearing or is it halving? I was hoping you could just give us some color around that. I just had a second question on net interest income. Thank you.
Sorry, Omar, do you want to repeat just the second question, please?
The second question on net interest income. Just wondering about the outlook from here, and particularly whether year-on-year 2016 NII. Could it stay flat on 2015, or what, I guess, is the outlook on NI from here given the rate environment going forward?
Thanks, Omar. If I start with that last one. I think if, as you say, if we for a minute assume that the Riksbank doesn't lower rates further and that spreads stay fairly stable from here, I think we are positive on the outlook of the NII. The reason I say that is that we are continuing the repricing of the mortgage book, and we are seeing in the corporate segment that we're seeing some volume growth, and we're seeing perhaps that the margins are also in the large corporate sector, perhaps bottoming out and starting to creep up a little bit, even though I don't want to make too much of that last comment. Altogether, that means it can be a little bit positive.
Okay.
On the fees and the seasonality that you've seen over the past few years in Q2, I think we pointed to this morning that the liquidity and funding measures that have been brought in terms of the LCR and NSFR, we are now getting closer to the actual date when NSFR is being applied. Our adjustments to that target means that we don't want to see the sort of peaks that we've had in the past on that line. You should expect less than the SEK 800 you referred to in 2015. How much less we'll see? How much lower we'll see. It'll certainly be less. You should remember, though, that there are costs associated with that as well. The net effect, I think, will be lower profit contribution, but remains to be seen how much less.
Okay. You're referring to costs, not net fee expenses, but actually on the operating cost line?
No, I'm referring to fee expenses.
Okay. I thought the SEK 800 million was a net number.
Yeah. Okay, then. Jonas, you're shaking your head.
No, but it depends on how much that you sort of say calculate into. Not everything is connected to this liquidity. You have other effects in the second quarter. The SEK 800 sounds high.
Okay. Understood. On the net interest income, I thought the comments on corporate loan repricing were interesting. Do you think this is to do with the increase in risk weights that we've seen?
Well, we had a question this morning, is the industry going to try to offload the cost of regulation? I think all banks have been saying yes to that question, and so have we. Whether that will be possible to do remains to be seen, and we were also saying this morning that it's an important factor in whether that's going to be possible is what the Norwegians and the Danes are doing, and whether we get a level playing field on that or not in this geography up here. If Norway and Denmark stays with lower capital ratios or requirements, then the ability to reprice is going to be more difficult.
Okay, great. Perhaps just a quick final question. Also related to net interest income. The quarterly change in NII that was specifically from funding and other, have we seen pretty much all of the effect from the Riksbank rate cut, or is there some spillover into Q2?
No, I think we've seen most of that now if they don't do anything further.
Okay, great.
As Annika commented earlier, I think what we're doing a little bit there between funding and other and the deposits NII contribution is that we're just making sure that in the internal pricing in the bank, that we're supporting our deposit gathering and making sure that we hold on to the volumes we've got. We're subsidizing a little bit between those two lines.
Okay, great. Thank you very much.
Thank you. Your next question comes from the line of Heino Loos of Goldman Sachs. Please go ahead.
Hello. Yeah, two things. The first thing I would generally like to ask you on capital and how much your current estimate would be, how the new measures would impact you by March of the PD floor and the maturity, and also if you can split it between the two and how you generally feel in terms of capital buffers from this. The second thing would be, because I'm not sure if I fully understand it when you. Omar, on the fee income side, you commented mainly on some fee expenses. Generally, if I look at your fee line, the things that brought it down, stuff like payment and card fees remain a bit compressed. Just to get a better Sorry, not payment and card fees.
Payment and card fees and lending fees and others, just to get a sense how much you would think are recurring. Probably it's fair to assume that on the payment and card fees, what we're seeing now is the level, and we should maybe take this SEK 100 million off just to get a feel for what you see sort of as the underlying sort of base. Sorry if I didn't [audio distortion] when you answered the previous questions. Thanks.
Okay. On the first question on the capital requirements, a few comments. We estimate that our regulatory minimum today is 16.2% on the common equity Tier 1. As you know, we entertain a management buffer of 150 basis points on top of that. What we've been saying on the new suggested corporate risk weightings from the regulator is that the combined effect of the M factor and the PD will be less than 1% taken off of the 19.1% that we published today, which means that we're still way above the minimum plus the management buffer. We haven't split it between the M factor and the PD, so I won't go into that here either. We think we can deal with that in a good way.
The comment I made on the fee number there, I think Omar from Deutsche was trying to come to terms with whether it was SEK 800 million net that was going to be a lower number in Q2 or not, and we, I think, come to the conclusion that it's going to be less than that. That will be the effect. We didn't go further into quantifying what that number was. On the interchange fees, we're saying that we lost about SEK 85 million compared to Q4, which makes up in the morning conversation around SEK 400 million lower in a year. In the morning we said we will be aiming to and think we will be capable of compensating some of that, but certainly not all of it.
Okay. Thank you very much.
Thank you. Your next questions come from the line of Anton Kriachin. Please go ahead.
Good afternoon. Just two questions, please. Firstly, continuing on the theme of fees, can you give us some sense of how corporate sentiment and corporate activity in the capital markets is developing in the first months of this quarter, whether you have accumulated substantial pipeline which you expect to benefit from? Secondly, on net interest income, specifically on the tailwinds from mortgage repricing, can you give us some sense where the gap between front book and back book rates are at the moment, how this gap has changed, and how do you expect it to evolve in the coming quarters as well? Thank you.
Okay. I can start with saying that the capital markets and the activity on the corporate activity overall, it has been very quiet the first quarter, and I think that is obviously what you have seen also on commission in SEB. We did see some more activity in March. We have not gone further in discussing that into Q2, but March was a pretty good month, and we see the markets are returning a little bit. Again, it's a bit too early to say that we anticipate that this activity will continue. March was better. When it comes to the difference between the front book and the back book, yes, there is a difference, and the front book is of course higher today. We have not said exactly how much, but it is better. We are growing slower than our peers.
On the other hand, we think with this new model, it's easier. I think the discussion, since we are so active in the larger cities where we have lost out on mortgages has not been due to interest rates. It's been more to the five times leverage, actually. We will find it easier to reprice today than in the past. It's of course easier that we all price the same way, and it's easier to deduct from something than to add on to something. For us it's been a relief to leave our old model, and that will, for the future also benefit the margin.
At the same time, we are more cautious regarding the market, we think that the market, not only the households, but also the co-ops, that one should be a little bit cautious here on the leverage in total. We need to look into that because we can clearly see that the market is moving rapidly.
Thank you. That's very helpful.
Thank you. Your next question comes from the line of Daniel Dotoy of JP Morgan. Please go ahead.
Hi, Daniel Dotoy here. Just two questions. The first one, a follow-up on the corporate margins. I apologize if I missed it, but basically, in addition to the regulation that you're seeing, the regulatory review of the Swedish FSA in Sweden, are you seeing any other factors that are influencing your more positive outlook on the corporate margins? Also, is it more broad-based, or is it relating to any specific industries? Then secondly, can you just give us an update on the on-balance sheet exposure to oil and gas? Related to that, one of your peers earlier this week reported a fairly substantial negative RWA effect from rating migration, citing deterioration in the credit quality of the oil book. Looking through your fact book, I guess you saw a fairly stable development, at least on a group basis.
Just wondering if perhaps you saw an offset elsewhere in your loan book or whether you're actually not observing the same kind of trends at this stage with regards to credit migration of the oil book. Thank you.
No, I think if I start to comment on the oil and gas, I think our view regarding that sector has not changed since Q4. We said when we launched the Q4 that we anticipate that during 2016 there will be restructuring in the oil and gas market, and we will see some of the restructuring. We are close to our customers, and that hasn't really changed, and that hasn't been needed to make any provisionings in this quarter due to that either. We follow it closely, and we think there will come restructuring. When it comes to corporate margins, I think one thing that has helped maybe the banks this quarter is that since the markets have been so volatile, actually issuing your own corporate bonds has become more difficult, actually.
I think that it shifted way back to the financial sector and getting help from the banks again. I think that has helped us. I think one thing is, of course, that we still see that international peers are maybe not so keen using their balance sheets either. I think it goes back to saying that only using your balance sheet will not be enough in the future. You have to make sure that you support your customers with many more sources of products, because it's going to be a very expensive way of only offering your balance sheet. I think what Jan Erik touched upon before, though, is that, of course, that we always worry about that the domestic Swedish FSA is harsh on Swedish banks. Of course, we have competition in Sweden, not only from Swedish peers.
That is something we are trying to be slightly more vocal about in Sweden, actually, and also trying to encourage the FSA to also talk to the Norwegian and Danish and Finnish FSAs so they keep it together slightly more than Sweden moving ahead. Because in that case, we will have more tailwinds than even our Nordic peers. International banks, they are usually not so keen to trade with [audio distortion] because they also worry about the balance sheet. It's been more a domestic issue. All in all, we do see the corporate margins have widened a little bit. From that perspective, it has been slightly better.
Okay, that's very clear. Just on the oil exposure, if you could give an update. I think it was about SEK 29 billion last quarter.
Yeah, it hasn't changed, actually. You want to comment?
It's very stable around SEK 30 billion.
SEK 30 billion. Got it. Thank you very much.
You're welcome.
Thank you. Your next question comes from the line of Adrian Cighi of RBC. Please go ahead.
Hi there. Thank you for taking my questions. I have two questions, one on capital and one on loan losses. On capital, I know you're now above your management buffer already as of Q1 and continuing to build capital even though you're occurring at the higher payout ratio of last year. I know it's early in the year, but could you potentially discuss any thoughts on the right capital levels for SEB? Would you consider having a higher buffer temporarily to deal with the uncertainty from the Basel regulation? Or alternatively, would you be able to provide us with what the impact of the Basel regulation standardized credit risk would be on SEB? The one on loan losses.
I see loan loss of eight basis points are a small increase versus last year, but remain very low historically, and you've talked about the oil exposures and the potential need for increase in that later in the year. Do you still see the full year level around 9-10 basis points, or should we think of a higher level? Any thoughts on that would be appreciated. Thank you.
Okay. Adrian Cighi, on the capital question, I think when it comes to the right capital level, I think we are going to stay for the time being with the 16.2 minimum and the 150 basis points buffer on top of that. Just as you say, we continue to build capital along the lines of what we did in Q1, 30 basis points a quarter or something along those lines. I think the question that you put is what is the Basel Committee going to come up with? I think the timetable for that is that around September, there's an important meeting in the committee in September. Sometime during the autumn, it'll start to be very clear what the Basel Committee's proposal will finally look like. We don't think it's very meaningful to the market talk about the potential impact from that at this stage.
The reason we say that is that it's going to go through the European Commission, and that's something that may take quite a bit of time. I think there is, what should we say? Varied levels of enthusiasm in the European Commission around the proposals from the Basel Committee. That also goes for the Swedish Regulator. By the time it's passed from Basel Committee through the Commission into the Swedish regulation, a number of years will have passed, and it may well have been watered down quite a bit. I think we'll have to come back and update you on what the potential impact might be, but I don't think it's meaningful to try to do that today.
Okay. Thank you.
Thank you. Your next question-
Yeah. Sorry, I forgot to comment on credit losses. I think we were quite clear also that the six basis points we had at year-end was extremely low. I think for a bank like SEB with the corporate exposure we have, I think we feel comfortable staying within eight to 10 basis points. There's no change in that, but that is still a very low figure. I think that probably can still be used. We don't really expect to see that big deterioration from where we are.
Many thanks, very helpful.
Thank you. Your next question comes from the line of John Molter of Credit Suisse. Please go ahead.
Yes. Hi, John Molter here, Credit Suisse. Just a couple of follow-ups from the meeting in Stockholm today. First, the RWA change, specifically the market and operational risk decrease in the quarter market risk decrease. What was the key driver of that, please? That's my first question.
John, we have variations in market risk all the time. There's a little bit of volatility in that number as we go, I don't read any more into it than that really. It just has moved up and down a little bit. I think we had a conversation this morning in the press conference where you attempted to value on the lines of, is this materially affecting the revenue line or not? I was arguing it doesn't really. I think there's supporting arguments or supporting evidence for that is the fairly good result on the trending line this quarter, even though the market risk came down a little bit. I don't think there's any drama in that.
Okay. There are no model changes, approvals, or anything that is impacting this quarter. Just see that the market risk number has been coming down here for, I think it's four quarters at least in the past year. If there's anything structural there.
No, there's nothing material coming out of model changes or structurally. It's just naturally a little bit less of a market risk in the attributes.
Okay, thanks. A couple of housekeeping questions there. The markets income by product line, I think the bank has previously provided us with that. I didn't find it. I don't know if you decided not to include it. We have the split on different products for exchange equities and fixed income, but the nominal level, if you're able to provide that. Secondly, what was the performance fees in the first quarter? I couldn't find that either, unfortunately.
Okay, regarding the two housekeeping issues, John, I think it's now when we have gone over to the new segment, the customer segment-based reporting, then we are then having large corporates and financial institutions, and we have then decided not to break it down further down. If we were to do that, then that would be large corporates in one and financial institutions in the other and not markets and corporate and investment banking and transaction services as before. We will not provide you with the markets number, but we thought it would be helpful to have the split to support the note under the NFI since markets is an important driver for the NFI line. When it comes to the second one on the performance fees, it is SEK 22 million for the first quarter.
Thank you. Is there any reason to believe that the performance fees could pick up materially during the rest of the year or are funds below the waterline, so to speak? It would suggest that to recoup the lost performance fees in the first quarter, it's difficult to get them back during the remainder of the year.
On the other hand, John, performance fees are always pretty volatile. They were surprisingly good in Q1 2015. We had a great start last year, and we've gotten slowly this year, but I'm going to feel very unhappy if we couldn't see it this quarter, I must say.
Okay, many thanks. That's very helpful.
Thank you. Your next question comes from the line of Jacob Kruse of Autonomous. Please go ahead.
Hi, Jacob from Autonomous. I just wanted to ask you about your dividend income in trading. Things like dividend stripping and these kinds of things. Could you just discuss or talk a little bit about how much money you made there and what changes you see on that business? Thank you.
Jacob, I don't think we will disclose the exact numbers we made on certain different business lines other than what's in the public disclosure. I think the arguments we put forward in the morning here is that as a result of the NSFR and the SFTs business, that business become significantly less attractive, and it just consumes too much of that resource. You will see a lower number, and I think it was Omar who kicked off the Q&A there with trying to come to terms with the number, and we're saying if it was SEK 800-ish last year according to Omar, then it's something less this year. How much less we'll see.
Okay, great. Thank you.
Thank you. Your next question comes from the line of Riccardo Rovere of Mediobanca. Please go ahead.
Good afternoon to everybody. Sorry, I didn't have chances to listen in to the press conference this morning, so apologize if I ask questions that have already been answered this morning. The first one is, what kind of chances do you attach to rates remaining where they are? If I'm not mistaken, before you stated if rates remain where they are, we are relatively positive on development of NII for the rest of the quarter. What kind of chances do you attach to rates remaining where they are first? The second question I have The feeling I have is that the intervention on risk weight from the Swedish FSA at the end of the day seems to be relatively mild. Risk weights in Sweden incorporate look to remain well below the European average.
Regardless of what the Basel Committee will decide and how long it will take, do you think the Swedish FSA will have more action on this in the foreseeable future? Thanks.
I think, Riccardo, on the first question on the probability of rates remaining where they are, I think we assign a fairly high probability to that. That's really our macro people that I'm quoting when we say that. We're at the 0.5 negative and to go further than that, there's quite a bit of signal from the different members of the Riksbank that maybe this is enough. I think we'll just have to wait and see, but that's what our macro people think anyway. In terms of the risk weights, I think the numbers that the different banks around here in Stockholm have quoted on the effects perhaps have been a little bit lower than expected.
I think the Swedish regulator is certainly trying to address what is, in an international context, low-risk weights on corporates, but it will not want to go the route of what the Basel Committee is suggesting. That's my understanding. I think they are trying to protect the risk-based view of the balance sheet to a much further extent than the Basel Committee is suggesting, and I think we'll just have to wait and see. Time will tell. It's very difficult to have a view on how long this will take or where it will end up, and I think the uncertainty around what will finally find its way into our balance sheets and our risk weights, the uncertainty around that is very high.
Okay, thanks. If I may follow up one second. Have you ever looked at reasons why corporate risk weights in SEB, but not just in SEB, in the Nordic countries in general, are so lower than anywhere else in Europe? What makes the corporate book of a Swedish bank, which operates in an open economy in a, I don't want to say global banks, but certainly not fully dependent just on Sweden. Why is the risk profile of the book of a Swedish bank so better to deserve such a capital treatment?
I think I can agree to that comment by saying that, first of all, I think the way we base our risk on actual facts. I think SEB, we go back to 1990. We have the crisis in the '90s in our numbers, and we have the crisis of Russia in 1998, then we also have the financial crisis in 2008. We have three different crises, 30 years back in our figures. Despite that, you can see how well the corporate portfolio has developed. I think it's very much that we operate in a small region, but we also know our corporates very well. We follow our corporates out in the world, but we don't expose ourselves to international corporates out in the world that we don't know. It's very much a relationship.
We also have the transparency, that in Sweden, the official figures is really that you can check yourself how the customers have been doing, how much they tax, how much they pay in salaries. Everything is transparent in Sweden, it's quite easy also to make a judgment. I think looking at Sweden saying, why do we have lower risk weighting? I think the reason is because we have shown in the past that we've had lower risks, also that the credit losses have been actually rather small in comparison to Europe, and also, of course, the transparency issue. I think that's part of why we also feel it's so important for us to continue. I think the only thing that is not acceptable that we've had in Sweden and in the modeling has been that the modeling has only been backward-looking.
That, I must admit myself, is probably not correct because just because you haven't lost anything in the last 30 years on some corporate doesn't mean that you can't lose in the future. You also, of course, have to add some uncertainty element also for the future. I think there is a big discrepancy, and I think you can see that also on corporate losses in other banks in Europe.
Okay, thanks.
Thank you. Once again, it's star one if you wish to ask a question. Your next question comes from the line of Muriel Parein of Citigroup. Please go ahead.
Hello. Thank you very much for taking my question. I'm calling from the credit team here at Citi. The Swedish National Debt Office published a consultation paper on MREL yesterday, and I have 3 questions related to that, please. First one is, I was wondering if you could just give us some color about what you understand your requirement would be under the proposed rules. Second one is on what type of liabilities you think you could use to fill that requirement, whether it would have to be tier 2 or a tier 1, or whether it would only be another type of debt, or whether it could be a mix of both.
Lastly, that's basically related to the first two questions, whether you could provide us with an update on where we stand in Sweden on the application of the BRRD, whether you think we are heading towards a French solution where you essentially have intermediate senior instruments or the Spanish way, intermediate sub-debt, or whether you think a German solution with statutory subordination of seniors would be the solution. What is your preferred outcome? Thank you.
Well, thanks. Let me try to deal with those. I think in terms of the requirements, I should firstly say that this is now very fresh information out of the National Debt Office. Again, it'll have to be interpreted and read through more carefully perhaps. I think a first glance at it is, of course, that they are trying to come to terms with how to define and size the recapitalization amount and the loss absorption amount and what constitutes those buffers. I think, in our case, the recapitalization amount, the way we read it, is going to have to be equivalent to the size of the total capital requirement today, which is 20.6%. The loss absorption amount is the total capital requirement less the buffers, which means 12.6%. If you add those up, you come to just north of 33%.
The second question is, I think the liability is what type of instruments? Well, I don't think AT1s will do it. It'll have to be, as you say, a sort of German-style solution where outstanding senior unsecured can be grandfathered into eligible MREL debt or a new asset class, a sort of a Level 3 asset class, which can then be made eligible. That's, I suppose, what you alluded to as the French solution. If we have to go down that route, that is quite a big change, I think, in terms of the structure of the market, it will affect all the banks in a very big way, I think. Large volumes of Level 3 instruments, if we call them that for a minute, will have to be issued, which means the phase-in period for that will have to be fairly long.
Bottom line, I think where we are now, we've certainly got senior unsecured outstanding. The German solution is an easy fix if you want. The French-style solution would take more time, but I think we can cater for both, given the time that will be available to do it. I said initially there's uncertainty, there certainly is. I think the TLAC requirements from the Americans will have to be factored in, which means time is going to be fairly long before we know.
Thank you. Do you have any update on where a decision would be taken by the government? Is it expected to happen this year still?
Sorry, can you say that again?
Is a solution or a decision on whether to follow the subordination of senior unsecured or the other solution expected this year? Do you have any idea of when the government could decide on that?
I think they're just saying that they're sort of kicking the can down the road a bit and saying that in 2017 sometime, they will try to make up their minds. I think they are aiming for some sort of subordinated solution, until then they are fine with the senior unsecured solution, so to speak. Earliest 2017 sometime. I haven't seen anything more specific than that.
Thank you very much.
Thank you. There are no additional questions at this time.
Okay. Thanks everyone for the interest and for the things today. If you have any, just let us know if you have any further questions.